>> Matt Nelson: Your company just gave you some stock as part of your compensation. What do you do next? If you're at a company that uses equity compensation as part of their hiring strategy or the bonusing, well, good for you. They can really supercharge your finances if you use them right. But you're probably here because you're wondering, what do I do next? Today we're going to cover a few common questions we get from clients in the same situation. Welcome back to the show, everyone. I'm Matt Nelson and my team at perspect of six wealth advisors has been helping people retire for over 25 years. We talk about what works and what doesn't in tax planning and investments. Now, before we dive in, we need to make some general assumptions. We're going to assume your company is a publicly traded company, and we're talking about restricted stock units, not other forms of equity compensation. Restricted stock units or RSUs are probably the most common equity compensation we see across our client base. And they're a lot less complicated than other forms such as stock options, which require triggering and other decision points. So question number one. Now that I have it, what do I do with my stock? Well, first of all, know your vesting Strategy. Especially with RSUs, you're going to need to know your vesting schedule in order to make any kind of sound strategy. What does this mean? Well, typically RSUs vest over a certain period of time, meaning the stocks aren't actually yours until certain triggers are met. In some cases, this could be a monthly vest or could also be annual. It can also be performance based or dependent on other job performance goals. Either way, understanding exactly how your vesting schedule works is uber important to understand any kind of strategy. And the pro tip here is set those vesting schedule dates in your calendar. Make some alerts, know ahead of time when they're going to be occurring. Now, after your vesting dates are met, the choice you're going to have is whether to keep your shares or sell them for cash. Keep in mind that whether you sell or keep your shares, you're going to be taxed on that value right away. And this tax is going to be similar to getting a cash bonus in your paycheck. So, for example, let's say you had a thousand shares vesting at $30 a share, pretty much the same as getting a $30,000 bonus in your paycheck. Now, if you're optimistic on the stock, you may choose to hold it after vesting, but you'll still pay taxes on it regardless of the decision to hold or sell now. If you sell the stock, you'll be able to use the cash to diversify into the rest of your portfolio, or maybe catch up on your college savings plans for the kids, catch up on expenses, even take a vacation. The reality is, the stock, when it vests, is the same as getting a cash bonus. And you're making a decision to take that cash and reinvest in the stock. If you keep it or just take it as cash, I know you're not really making a decision to repurchase the stock or buy it with the cash, but you need to think about that mental model. Thinking about it this way makes it easy to understand. If you had cash in your pocket, would you take it out and buy your company stock? If you wouldn't, then you probably should just sell the stock at best. So that brings us to question number two. How are the taxes handled? Again, assuming these are RSUs, they're going to be taxed as you receive them as you vest. Typically, the mandatory withholding rate for RSUs is going to be 22%, but that's unlikely to cover the tax bill for most people. This is why careful tax planning is needed for RSUs and for all your equity compensation. So what you need to do is take a look at your total household income and, uh, based on that, determine if more withholding is needed or you'll need to make some estimated tax payments. For example, let's say you earn 300,000 a year and you're filing singly, and you get all the RSUs we described above on top of your paycheck. You're already going to be in the 35% tax bracket with your normal income, and all that RSU money is going to go on top. So obviously the 22% regular withholding is not going to work in this situation. Now, often you'll be able to elect a higher withholding rate. It's usually set at 37%. So the typical is 22 and then 37. Some companies we're seeing are allowing a little more customization on this withholding schedule because the default to 37 as the next step up is often more than some people need. If you want to get more precise, really, you should just make your own tax estimates. And you probably should work with a financial advisor like us or another tax professional to help you get dialed into something close. Okay, so let's take it a step further. Let's say you hold the stock after it vests. Well, now you've opened the door up for capital gains taxes, which could be a, uh, part of the equation if after vesting the stock price increases in value. It could also be a capital loss if after vesting the stock price declines in value. Either way, the point is as soon as you're vested, that stock, if you hold it, becomes a capital asset subject to different kinds of taxes going forward. So let's take an example. Let's say you vest at $30 a share, you hold it until it's worth $40 a share and you sell it. What's going to happen? Well, if it's been less than 12 months, that gain of $10 a share is going to be at, uh, short term capital gains rates. These are basically going to be your ordinary income brackets, just like paycheck. If you hold that stock beyond 12 months. Well, now that $10 a share gain is going to be taxed at, ah, capital gain rates. Long term capital gain rates. For most people, long term capital gain rates are going to be 15%. But as your earnings are higher, you could see those rates go to 20%. You may also be subject to net investment income tax, which is an extra tax at 3.8%. This is a surcharge tax that only affects higher brackets. But realistically it starts to kick in around 250,000 for married filing jointly. So it's very easy for households to cross into this level. And uh, don't let any of the tax issues concern you. It's just a matter of whether you're going to hold the stock, whether you're going to sell it right away, you're going to have different types of taxes due. Remember, you're not getting taxed twice. You're getting taxed at receipt for compensation. And then your choice to hold or cash out determines whether you're going to pay tax on any future gains. This is no different than if you took your own cash out of pocket and bought your own set of stock shares. The main item to be concerned with is whether you're going to have enough cash on hand to pay those taxes that are due and just planning ahead for it. So that brings me to question number three. How much should you keep? How much should you sell? In general, you need to ask yourself a couple of questions. Number one, how optimistic are you on the stock? And number two, how much of your financial life is already exposed to this company? So when you look at the first part of that, are you optimistic on the company stock? You could feel really good about your company, where it's going, where they've come from, but make sure you're looking at it through a logical lens of will your company actually increase any faster than the regular stock market? If really that isn't the case, if you don't expect hyper growth above normal diversified portfolios, you may be better off taking the cash diversifying into your portfolio and lowering the risk level. If on the other hand, you feel you know this company's really going somewhere, it's going to far out seed the markets. You need to make a determination of how much you should take off the table now to make sure to cover your taxes that are going to be due, maybe any short term expenses that are coming up, and then be fully aware the remainder that you leave in the stock could become a loss as you hold it. That's of course not unlike any other investment that you would hold. But just understand if you're making that choice based on a hyper growing company, probably that company is a little extra risky over the stock market anyway. And that's why we need to look at the second part of this question. How much of your financial life is already exposed to the company? I think this gets overlooked by a lot of employees who are very loyal to the company and think it's going places, which is fantastic. That's where you want to be working. But think about it this way. Your job, your salary, your benefits, essentially your livelihood is tied to this one company. What if the company goes through a bad earnings period and that happens to coincide with some layoffs and you lose your job at the same time? Obviously it could be a disastrous situation if you piled on top of that that you'd held the stock and hadn't sold enough to pay for the taxes coming due, it's going to be very difficult. So the decision about how much of the stock you keep from your RSUs, how much of it you sell, really should just be based on having looked at your current situation and really understanding risks on a go forward basis. Okay, so let's wrap up. I've answered three key questions, key common areas that we get from our clients when they receive RSUs as part of their equity compensation. We talked about a few of the basic decisions that have to be made around vesting schedule, the timing of when you receive things, and taxes due. We also covered how taxes work and to prepare for paying those either through the proper withholding or or making your own estimated tax payments. And finally, you really got to look at your own personal goals. Should you hold on to the stock for future gains? Is it really going to move further than the regular stock market or are you more prudent just diversifying your portfolio and being comfortable with receiving more RSU's in your everyday bonus plan. Now, if you found this helpful, please like and subscribe. You can also check out other videos we have on retirement planning. Remember, financial freedom takes more than money, so make a plan to live your life well. If you need any guidance, we're here for you.

>> Speaker B: Thank you for listening to the Medtech Wealth Advisor podcast. Click the Follow button to be notified when new episodes become available. Visit our website at www.prepertive6group.com or give us a call toll free at 888-591-9770 or locally at 952-225-0333. And don't forget to click the Follow button to be notified when new episodes become available. The views expressed are not necessarily the opinion of OSAIK Wealth, Inc. And should not be construed, directly or indirectly as an offer to buy or sell any securities mentioned herein. Investing is subject to risks, including loss of principal invested. Past performance is not a guarantee of future results. No strategy can assure a profit nor protect against loss. Please note that individual situations can vary, therefore, the information should be relied upon when coordinated with individual professional advice, Investment advisory, insurance and financial planning Services offered through Focus Financial, Inc. Securities offered through ozaik Wealth, Inc. Member finra SIPC OSAIC wealth is separately owned and other entities and or marketing names, products or services mentioned here are independent of OSAIC Wealth.